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Running a small business has never required more resilience.

Rising costs, digital compliance deadlines, new expectations from customers and suppliers — it can feel like the ground is constantly shifting beneath your feet.

That’s why on 5 November, from 1–1:45pm, Sage is hosting a free webinar — Small business, big savings: Simple steps to smart growth in 2026 — alongside Smart Energy GB, Allica Bank, and the Federation of Small Businesses (FSB). It’s designed to give you clear, practical guidance you can act on straight away.

Register now to reserve your seat. This article lays out the core topics we’ll be covering, so you can get ahead of the curve.

Here’s what we discuss:

1. Making Tax Digital: What it means for you

From April 2026, Making Tax Digital (MTD) requirements begin to apply to sole traders and landlords with gross income over £50,000, It applies to those with gross income above £30,000 from 2027, and then gross income over £20,000 from 2028.

Even if you’re not directly impacted yet, it may affect how your suppliers invoice you or how you share financial data.

In the webinar we’ll discuss issues like:

• Why manual spreadsheets are problematic when it comes to meeting the new mandatory digital record-keeping requirements, and the requirement to use MTD-ready software.
• How digital submissions at least quarterly are mandatory, along with a new digital tax return — and late filings risk penalties.
• Why teams may need basic digital training to stay compliant without stress.
• How MTD-ready accounting software will bring with it smart bookkeeping that saves more than time — it reduces errors and improves your financial visibility.

If you’re not yet tracking your finances in a digital system, now is the moment to get ready — before deadlines create pressure. You should be looking at upgrading your accounting software, or consulting with your accountant and bookkeeper.

2. AI in accounting: Freeing up time when it matters most

AI is about removing repetitive admin that gets in the way of growth. Tools like Sage Copilot can already help businesses to the following, and it’s only getting better:

• Get paid up to seven days faster with automated invoice chasing.
• Save five or more hours a week by handling manual data entry and reconciliation.
• Begin to automate emerging requirements, such as carbon data classification and digital reporting.

As AI becomes fixed within day-to-day accounting via tools like Copilot, the businesses that benefit most will be the ones who understand where it fits — and where the human eye and expertise still matter. Trust in your financial data will become just as important as speed.

AI can be found in many products, especially agentic AI, in which the AI is proactive and informs you of problems before they’re obvious. Start investigating this technology now, and seek recommendations from professionals. We’ll dig down into more about how you can adopt AI – and its benefits – in the webinar.

3. Smart Energy management: Reducing cost through visibility

Energy is still one of the biggest overlooked overheads for small businesses. Without visibility, it’s nearly impossible to plan, budget, or spot waste.

That’s where smart meters and energy data come in. In our webinar Smart Energy GB will discuss this and how, by tracking real-time usage, you can:

• Identify peak-cost periods and adjust around them.
• Improve cash flow forecasting based on accurate energy trends.
• Spot wastage that builds up quietly over time.

If you’re not yet using energy data to inform business decisions, Smart Energy GB will explain in the webinar how small changes make a measurable difference. You can also read our recent Sage guide on smart energy management for a deeper dive.

In the webinar we’ll discuss issues like using smart meters, seeking flexible tariffs, shifting high-energy tasks to off-peak, and more.

4. Finance and the Growth Guarantee Scheme: Rethinking borrowing

Borrowing doesn’t just fund expansion. It can be used to cut long-term costs. Whether it’s solar installation, electric vehicles or insulation to lower bills, financing upgrades can improve your margins.

Specialist lenders like Allica Bank are reshaping access to finance for established small businesses, and the Growth Guarantee Scheme is designed to make borrowing more accessible.

We discuss more in our webinar but action to take now include exploring funding options outside high street banks and speaking to your accountant or a specialist broker about preparing your financials for lending.

Finance is becoming a strategic tool, not just a last resort.

5. Carbon reporting: From optional to expected

37% of SMBs have already been asked to provide carbon data when bidding for work, and this number is rising across both private and public procurement.

That means even small suppliers are being assessed not just on price and delivery, but on impact transparency.

Carbon reporting doesn’t need to be complex. With the right approach, it can be automated alongside your financial processes. If you bid for contracts — or plan to — starting now will put you ahead, rather than blocking opportunities in 2026.

We discuss in our webinar how the right software for carbon accounting is essential, and can build on top of existing accounting data you already have. So, a first step is to start investigating this kind of software, and the benefits it can bring, as well as the methodologies that you can use.

Final thoughts

This is one of the most uncertain times for businesses we’ve seen in recent times. While there’s no way to control world events, it is possible to try and be prepared for whatever the future brings. That’s what our webinar is about – and you’re invited.

Fitness is your passion—now it’s time to make it pay the bills.

Opening your own gym is an ambitious and rewarding venture, but the biggest question is: “how much does it cost to open a gym?” Gym startup costs vary greatly depending on the size and type of operation you want to run.

That’s why we’ve created this worksheet and companion guide to determine the cost to set up a gym and calculate the details of what it will take.

Here’s what we’ll cover:

Breaking down gym startup costs

So, how much does it cost to start a gym? To answer that, you’ll first have to figure out what kind of gym you have in mind, and where.

A modest studio gym in a small town might cost significantly less to get off the ground than a mid-sized or large gym in an affluent suburb or urban area.

That said, as a rough estimate, you can expect an initial investment of £75,000-£120,000 in upfront costs to open your gym.

And how much does it cost to build a gym from the ground up? For that, you’ll have to raise the financial estimates by a wide margin.

Take into consideration factors such as square footage, location, and whether or not you’ll rent or own the gym you’re building.

Your costs could range from several hundreds of thousands of dollars—all the way up to several million pounds in some cases.

If you’re franchising, a typical initial investment can range from £19,950 (low-end) to between £1.7 million and £3.8 million for a high end establishment.

Regardless of your particular business path, it’s helpful to break down the costs into two categories: one-time startup costs and recurring costs.

One-time costs

Make no mistake, the initial costs of opening a gym aren’t cheap.

However, your wellness venture may or may not need to consider every item on this list, so feel free to pick and choose the applicable items and add them to your worksheet.

Physical location

This cost will vary greatly depending on desired size and location of your gym, as well as your decision to rent or purchase the building.

Aside from space for weights and machines, you may wish to include space for cardio, yoga, or spin classes. Additionally, you might provide locker rooms, showers, and a sauna.

If you’re buying, you will most likely need to cover a deposit of 25% of the property value, with average amounts ranging from around £21,250-£407,978 (plus additional taxes and renovations).

Average rental deposits (six months of rent) are in the range of £2,304 – £68,472.

Gym equipment

This cost similarly has a large range, depending on the amount and type of equipment you want.

As a rough estimate, your you’ll likely need to spend around £40,000 to buy equipment for 20 members.

Be sure to shop around—and keep in mind you can often get a discount if you purchase the equipment in sets as a complete package.

Licences, permits, and certifications

There is no specific, overarching licence needed to open a gym, but you will need to register your business.

Registering as a sole trader or a business partnership is free, whereas registering a limited company costs £50 online.

You might need various other licences and permits, including planning permission (if you’re changing the use of a building), music licencing (if you plan to play music in the gym), and a food hygiene permit (if you will be selling or preparing food and drink).

You’ll also want to make sure you comply with health and safety regulations, including doing risk assessments and having the appropriate insurance in place.

Don’t forget to check that the personal trainers and other gym staff you hire are properly qualified.

Legal and consulting fees

You may need professional help negotiating your lease, closing the property sale, or just muddling through the necessary licences and permits for your gym.

Expect to pay around £200 per hour for these services.

Point of Sale (POS) system

You’ll need to get set up with a POS system to accept customer payments, as well as proper gym management software to keep your business running smoothly.

You can expect to pay around £20-£200 per handheld card reader, and anywhere from £250 to over £1,000 for a countertop terminal or full till system.

Signage

Here’s an opportunity to get creative and this cost will vary a lot based on your specifications, like size, design, and materials used.

As a rough average, you should count on spending between £450 and £3,000 for a 1m x 5m shop sign that’s suitable for external use.

Employee uniforms

This is another cost that is entirely up to you.

You generally want some uniformity across staff wardrobe, but for a gym, simple workout clothes and company logo shirts are typically the norm.

If you’re planning on supplying your team with a few polo shorts or t-shirts and perhaps a hoodie or jacket, with your logo on them, £30-£80 per staff member might be a realistic ballpark cost.

But it could be less or significantly more, depending on the uniform requirements and quality.

Merchandise

Don’t overlook a great opportunity to offer customers supplies and merchandise. Think t-shirts, supplements, protein shakes and powders, water, etc.

Make sure you budget in the cost of the initial stock.

As an example, a startup stock of merchandise—including 50 branded t-shirts, 20 branded hoodies, 100 branded plastic sports bottles, and 50 branded microfibre gym towels—would be around £1,700 – £2,000, depending on the exact quantities, quality choices, and complexity of branding.

Marketing and advertising

You’ll want to announce your arrival to attract potential customers.

The average cost of a multi-channel marketing campaign to announce the launch your gym could range from around £7,000 to £72,000 or more, including the set-up cost of a new, responsive website.

Your total will depend on which marketing channels you prioritise, but they could include digital adverting, a content and SEO strategy, and targeted local or regional print and broadcast adverting.

Contingency budget

It’s a good idea to make sure you have a contingency fund in place to cover normal business costs and any unforeseen expenses.

Aim to have enough reserve funds to cover three to six months of operating expenses.

Recurring and ongoing costs

Since the ongoing cost of owning a gym varies so significantly between gym types and sizes, we’ve made a list of potential costs for you to consider in your venture.

Exact figures may be more or less for your operation, but these average gym operating cost categories should be on your mind.

While there are a lot of expenses to keep track of here, these can be easily managed using expense tracking software.

Mortgage or lease payments

Regardless of whether you rent or purchase the property your gym is based in, you’ll have a monthly expense in the form of a mortgage or lease payment.

Costs will vary significantly depending on the factors outlined above and the final cost of the building or loan amount.

Insurance

You’ll need public liability insurance and employers’ liability insurance and professional indemnity cover.

You should also consider buildings or commercial property insurance, as well as contents or specialist equipment insurance.

It’s a good idea to invest in cover for business interruptions as well.

You can expect to pay a minimum of around £1,000 per year for a small gym with four employees, but depending on the cover you need, your insurance could easily cost £1,500-£3,000 or more per year.

Equipment lease payments

If you choose to go the leasing route for your equipment, make sure to budget for those payments.

As a general estimate, you would potentially be looking at around £2,500 per month for a full commercial gym setup, catering to 200 members.

Utilities

A gym uses a lot of electricity, especially if it’s open 24 hours a day. You could easily be looking at around £2,000 per month for utilities.

Equipment repairs and maintenance

Gym equipment takes a beating day in and day out. Make sure you factor in repair and maintenance costs in your budget.

This could cost you anywhere from around £1,000 per year for a smaller gym to £11,000 or more for larger gyms.

Cleaning supplies

Cleanliness and sanitation is a must for a gym. You’ll need mops, vacuums, toilet paper, bleach, wipes, laundry service, etc.

For an average-sized gym, you can you can expect to pay somewhere in the region of £200-£300 per month, based on bulk buying.

HVAC maintenance

This is your heating and air conditioning, and it’s pretty important upkeep for a gym.

Generally, the maintenance cost can range from around £50 to £200 per unit, depending on the type of system you have and the service that’s needed.

Internet and Wi-Fi

Your customers will appreciate free Wi-Fi. The average price of business broadband in the UK is around £40 per month.

POS software

In terms of payment and business management software, solutions typically range from around £20 to £200+ per month.

Employee wages

Employees will earn varying salaries depending on their skills and experience levels.

Make sure you have payroll for the first few months on hand before opening—it may take some time to turn a profit.

Credit card processing fees

Business credit card processing fees typically range from 1.5% to 3.5% of the transaction amount.

Marketing

It’s up to you if you want to make your marketing efforts an ongoing cost.

You’ll have to consider your individual business model and measure the return on investment of different marketing strategies. Most businesses spend 2-5% of their revenue on marketing.

Legal fees and professional fees

This is a fluctuating expense, as it depends on your particular business model and situation.

Just keep in mind that professional services, such as accounting or legal, typically cost around £200 per hour at least.

Common gym startup myths & mistakes

Every gym startup operation is different, saddled with its own unique set of challenges to face.

You’ll have to accept that you’re bound to make some mistakes. Our advice: just make sure to avoid these common missteps.

1. Don’t skip the training and accreditation. As a fitness professional, your clients look to you as an authority, so make sure that’s the truth. Proper training and accreditation is key to the success of your clients’ goals and therefore the success of your gym as a business. You aren’t serving your clients or yourself if you and your staff are not properly trained. Accreditation in niche or specialty fitness markets is also a great way to set your gym apart from competitors.
2. Don’t begin without a client base. If you’re considering opening your own gym or fitness centre, you most likely already have a number of clients. A gym is a tough business to start from scratch, so you really want to make sure you have a sustainable number of devoted clients who will become members. If you don’t have any sure clients at the outset, don’t invest in opening your own gym at this stage—work on building your client base on a smaller scale.
3. Don’t skimp on equipment quality. Across the board, you want to make sure your equipment and facilities are up to snuff—if not for your members, then for your own bottom line. Gyms take a lot of abuse and going cheap on flooring will cost you more in the long run when you have to replace it. Buying used machines may be less expensive at the time, but you’ll sacrifice access to the full manufacturer’s warranty coverage, as well as up-to-date technology to best serve your members.
4. Don’t surprise your neighbours. There’s going to be some noise. Weights will be heavy, music will be pumping, machines will be whirring—even downstairs neighbours of a zen yoga studio will hear some thumping. If your space is connected to, or within earshot of, others you’ll want to be fully upfront about the inevitable noise with your landlord and neighbours. The last thing you want is for your business to have a negative impact on its surrounding area, so make sure you clear this issue early on.
5. Don’t forget about the gym management software. Naturally, you’ll want your gym to operate smoothly and efficiently. A lot goes on behind the scenes with each membership. Sophisticated software to handle check-ins, billing schedules, membership renewals, day-to-day scheduling, and various other administrative tasks may not be cheap, but it’s worth every penny. Remember: automation is your friend.

How to use the gym startup cost worksheet

Our gym startup cost worksheet is easy and intuitive to use. Once downloaded, it’s fully customisable to fit your needs.

The template includes some high and low-end estimates for starting a gym to get the ball rolling.

• Download the free template.
• Add or remove fields applicable to your particular gym startup type.
• Assess your needs and related costs.
• Make a note of costs that might change or costs to be determined.
• Plug in your numbers and enjoy the simplified breakdown of your startup and ongoing costs.

Sage lets you focus on building your business, not tracking expenses

Opening and maintaining a gym requires a lot. Day in and day out you invest your time, energy and focus into creating something amazing.

So why waste your valuable time and efforts tracking expenses the old-fashioned way?

Administrative tasks can now be fully automated—so upgrade your business model with Sage Accounting.

You have enough on your plate and our online accounting software can save you time and money. Outsource the busy work and get back to doing what you do best—making your business a success.

Additional startup cost templates

Is our sample gym startup cost calculator not what you’re looking for? Please check out our other templates. We also offer solutions for all of your startup needs.

Restaurant startup cost calculator
Food truck startup cost calculator
Beauty salon startup cost calculator
Bar startup cost calculator

Important information about these gym startup costs

The startup costs shown here by industry are merely guidelines and average estimates based on information pulled from a variety of sources. While we have attempted to present the most accurate information available, please be aware that startup costs can vary greatly according to a number of factors, including but not limited to your location, local fees, and contractor quotes. The information presented here is intended to help guide prospective business owners in the search for information on starting a business within a given industry, but should not be interpreted as an exact quote.

Sage provides the information contained here as a service to the public and is not responsible for, and expressly disclaims all liability for damages of any kind arising out of use of, reference to, or reliance on any information contained on this site. While the information contained on this site is periodically updated, no guarantee is given that the information provided is correct, complete, and up-to-date. Sage is not responsible for the accuracy or content of information contained on this site.

As one of the 3 main financial statements, a cash flow statement is an essential tool for understanding a company’s financial health, assessing its liquidity, and confirming how much cash it has on hand.

Along with the balance sheet and income statement, this set of financial documents are required for both private and public companies.

 A standard cash flow statement format encompasses three main sections: operating activities, investing activities, and financing activities.

 This guide will cover not only a cash flow statement template, but also how to prepare your cash flow statement, what to include in the three main sections, and how the direct and indirect methods differ.

We’ll also cover IAS 7 requirements for cash flow statements, including recent changes companies should keep in mind.

For more information, you can also read cash flow statements explained here.

To prepare a statement more efficiently, download our free cash flow template.

Here’s what we’ll cover

Completing the main sections of the cash flow statement

To prepare a cash flow statement, follow these six steps:

1. List the opening balance

Begin by listing the opening balance of cash and cash equivalents for the reporting period.

This figure should equal the closing balance from the previous reporting period.

The starting balance can be placed at the top or the bottom of the statement.

2. Input cash flow related to operating activities

This section can use either the direct or the indirect method.

• When using the direct method, record all cash received and all cash paid. Then, calculate the total.
• When using the indirect method, start by listing the company’s profit or loss for the reporting period (under IFRS, which applies to UK companies). Then, take steps to reverse the effect of the accruals. Adjust for elements like depreciation and amortisation, and then calculate the total.

Under IFRS, companies may choose from several different starting points when using the indirect method.

Options include:

• Profit or loss
• Profit or loss before tax
• Operating profit or loss
• Profit or loss from continuing operations

List cash inflows and outflows from operating activities:

• Receipts from goods or services sold: Add any cash receipts from goods (for a product-based company) or services (for a service-based company).
• General operating and admin expenses: Subtract any cash payments to suppliers for goods and services related to the company’s core business activities. Also include office expenses, rent and utilities for the company’s facilities.
• Wage expenses: Subtract any cash used to pay the company’s employees, executives and directors.
• Income tax payments: Subtract any cash used to pay for the company’s income tax.
• Other operations: Add any cash receipts that fall outside of the core business activities. Such as license income, the share of profits from joint ventures or grant monies received.
• Depreciation and amortisation adjustments: Add in the value of any depreciation and amortisation to undo the effect of these accruals.
• Change in inventory: Subtract the value of any increases in inventory or add the value if inventory has decreased.
• Change in operating assets: Subtract the value of any increases in operating assets such as accounts receivable and monies owed to the business or add the value if operating assets have decreased.
• Change in operating liabilities: Add the value of any increases in operating liabilities such as accounts payable or subtract the value if operating liabilities have decreased.

Note that the process is similar to that for calculating the change in operating assets but that the process is reversed.

3. Input cash flow related to investing activities

In the next section, list cash received and paid from investing activities.

Tally all cash inflows and outflows related to buying and selling property and assets that increase the value of the business.

Note that IFRS allows for interest and dividend receipts to be included in either investing or operating activities.

The classification of these receipts must be consistent between reporting periods.

• Receipts from the sale of property and equipment: Add any cash received from selling assets such as property and machinery.
• Collection of loans: Add in cash from receiving financing from investors, mortgages or loans.
• Proceeds from disposal of investments: Add in any cash received from the sale of marketable securities, or other investments such as contracts or IP rights.
• Purchase of property and equipment: Subtract any investments in assets such as property and machinery.
• Loans to others: Subtract payment of monies in the form of loans made to others, typically subsidiary companies.
• Purchases of investments: Subtract any cash paid from purchasing marketable securities, or other investments such as contracts or IP rights.

4. Total cash flow related to financing activities

Here, list the cash received and paid from financing activities.

Tally all cash inflows and outflows from fundraising and repaying debts that allow the company to operate or grow.

Note that IFRS allows for interest and dividend payments to be reflected in either financing or operating activities.

Their classification must remain consistent between reporting periods.

• New banks loans: Add any cash received from bank loans or other creditors.
• Proceeds from issuing common stock: Add any cash received from the sale of equity, stock, or bonds.
• Repayment of bank loans: Subtract any cash paid to repay loans and debt, either from investors, mortgages or the bank.
• Dividend and interest payments: Subtract any cash paid to pay dividends and interest. Under IFRS, dividend and interest payments may be classified as operating activities instead.

5. Determine the total change in cash

Calculate the total change by adding together the operating, investing, and financing activities.

This figure reflects the total increase or decrease in the company’s cash and cash equivalents.

6. Calculate the cash at end of year

Finally, determine the ending balance. Add or subtract the increase or decrease in cash and cash equivalents to the starting balance for the cash flow statement’s reporting period.

A positive balance indicates that the company has more cash flowing in than out.

A negative balance confirms that the company has more cash flowing out than in.

The difference between direct and indirect cash flow statements

Both IFRS and HMRC allow the direct or the indirect method of calculating operating activities.

While both methods provide the same end result, they have several important differences.

	Direct method	Indirect method
Accounting method	Uses cash accounting, which tallies cash when it’s received or paid	Uses accrual accounting, which tallies cash when it’s earned
Starting point for calculating operating activities	Not applicable; simply lists cash inflows and outflows from operating activities	Starts with profit or loss under IFRS; starts with net income under GAAP
Estimated work level	Tends to be higher, as it requires listing all cash transactions	Tends to be lower, as it works back from the income statement
IFRS requirements	Must reconcile net income to net cash flow from operating activities	None
GAAP requirements	Must reconcile net income to net cash flow from operating activities	None

IAS7 requirements for cash flow statements

IFRS uses IAS7 (International Accounting Standard 7: Statement of Cash Flows) for preparing cash flow statements.

Below are some requirements to keep in mind when using this standard.

Operating, investing, and financing activities

Any company using IFRS standards must analyse cash flows using 3 types of activities:

• Operating activities: Focus on cash received and paid from revenue-producing activities
• Investing activities: Focus on acquiring and disposing long-term assets and investments
• Financing activities: Focus on borrowing funds and repaying debts

Direct method for reporting operating activities

For the direct method for reporting operating activities, IAS7 requires reconciling net income to net cash flow from operating activities.

This extra step aligns the statement of cash flows with the income statement.

Indirect method for reporting operating activities

IFRS also allows the indirect method for reporting operating activities. IAS7 requires using profit or loss as the starting point.

As of 2024, companies may define this starting point in one of several different ways.

However, IAS7 requires a standard starting point for reporting periods starting January 1, 2027 (read more below).

Reporting investing and financing activities

IAS7 requires companies to report most investing and financing activities gross, categorised by type of receipt or payment.

However, this standard requires certain activities to be reported net, including:

• Cash received or paid on behalf of customers
• Cash received or paid for items in large amounts, with rapid turnover, and with short maturities
• Cash received or paid related to financial institution deposits

Dividend and interest payments and receipts

IAS7 allows some flexibility when reporting dividend and interest activity.

Both may be considered operating activities.

Companies have the option to consider dividend and interest receipts as investing activities instead.

Companies may also consider dividend and interest payments as financing activities.

However, IAS7 requires companies to maintain consistent classification between reporting periods.

Disclosures

Non-cash investing and financing doesn’t appear on the cash flow statement.

However, IAS7 requires companies to disclose these activities in other financial statements.

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Recent IAS7 changes to cash flow statement preparation (2024)

A recent amendment to International Financial Reporting Standards (IFRS), issued in April 2024, means that for annual periods starting on or after 1 January 2027, companies must use the operating profit or loss subtotal as the starting point for the indirect method in cash flow statements.

If your business chooses to adopt this change early, it’s important to clearly disclose this decision in your financial statements, following IFRS guidance.

This update aims to make cash flow statements more consistent and easier for investors to compare.

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Cash flow statement templates

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What are the 3 main sections of a cash flow statement?

Whether a company uses IFRS (International Financial Reporting Standards) or GAAP (generally accepted accounting principles), a cash flow statement consists of three main components:

Operating activities

Operating activities refer to the company’s primary revenue-producing activities.

Think of them as standard business activities that generate cash inflows and outflows.

Revenue covers cash coming into the business from goods and services, and out of the business to wages, operating expenses and income tax payments.

Investing activities

Investing activities refer to investments the company makes using cash, not debt.

However, for investment companies, investments are reflected in the company’s operating activities.

Investing activities cover buying and selling long-term assets.

The buying and selling of investments such as IP rights or contracts and the collection and issuance of loans from the business to subsidiaries of the company.

Financing activities

Financing activities refer to cash investments in the company.

They include cash inflows from raising funds and cash outflows from repaying debt.

Cash flow from financing activities can come from receiving financing from investors, issuing payments to shareholders or repaying debt principal.

What are cash and cash equivalents?

Cash flow statements reflect a company’s balance of cash and cash equivalents at the beginning and end of the reporting period.

These statements also show the total change from the beginning to the end of the period.

Cash

Cash includes both currency and demand deposits.

The latter refers to money held in bank accounts from which the depositor can withdraw at any time without significant financial risk or penalty.

In addition to domestic currency, cash can also include foreign currency.

The value of any foreign currency should reflect the exchange rate on the date the company received the cash.

Cash equivalents

Cash equivalents are investments designed to meet short-term cash commitments.

These highly liquid investments have a maturity date of 3 months or less after acquisition.

In addition, they can easily convert into known cash amounts.

As a result, cash equivalents have a very low risk of changes in value.

Cash equivalents can include:

• Money market funds, government bonds, and corporate bonds that meet the definition above and maintain an insignificant risk of changes in value
• Shares that were acquired just prior to maturity and that have a firm redemption date
• Bank overdrafts that are part of the company’s cash management strategy, meaning the company regularly fluctuates between positive and negative demand deposit balances

What’s the difference between an income statement and a cash flow statement?

As two of the three main types of financial statements, both cash flow and income statements offer insight into a company’s financial performance.

Yet they do so from different perspectives.

Cash flow statements

Cash flow statements confirm how liquid a company is.

They reflect cash paid and received, revealing how much cash a company has on hand at the end of a reporting period.

Income statements

Income statements also called profit and loss (P&L) statements confirm how profitable a company is.

They reflect revenue and expenses accrued during a reporting period, including non-cash accounting like depreciation and amortisation.

What isn’t included in a cash flow statement?

A cash flow statement doesn’t reflect:

• Debt instruments that have a maturity date of more than 3 months after acquisition and that carry significant risk of changes in value.
• Most shares as they have a significant risk of changes in value and they aren’t convertible to a preset amount of cash.
• Cryptocurrency and gold because they aren’t readily convertible to predetermined amounts of cash.
• Restricted cash and cash equivalents that a company can’t readily access because of legal restrictions or financial controls, such as funds owned by a subsidiary.
• Non-cash transactions that don’t have a direct effect on a company’s cash inflows or outflows

What’s the difference between GAAP and IFRS for cash flow statements?

GAAP and IFRS use similar guidelines for preparing cash flow statements.

However, the way the two accounting standards classify cash flow activities differs.

IFRS considers the nature of the activity when classifying cash flow.

If using the indirect method, GAAP will use items from the income statement (net income, depreciation expense, etc) to prepare the cash flow statement.

Here are several ways these differences affect cash flow statements:

Bank overdrafts

If your business uses bank overdrafts that are repayable on demand and these overdrafts are part of your regular cash management, IAS 7 allows you to include them as cash equivalents in your cash flow statement.

This means that when your cash balances often move between positive and negative, you can show these overdrafts alongside cash and other cash equivalents, giving a clearer picture of your day-to-day cash position.

Restricted cash

IFRS requires companies to disclose restricted cash (i.e., inaccessible balances held by the company’s subsidiary) in the cash flow statement.

UK IFRS requires restricted cash to be disclosed separately in the notes to the financial statements.

Dividend and interest receipts

IFRS allows dividends and interest paid to be classified as operating or investing activities.

UK IFRS allows flexibility in classifying dividend and interest payments, which may be treated as operating or financing activities depending on the company’s policy.

Dividend and interest payments

IFRS allows dividends and interest paid to be classified as operating or financing activities.

Under UK IFRS, companies may classify dividend and interest payments as either financing or operating activities, provided the classification is applied consistently across reporting periods.

Discontinued operations disclosures

IFRS requires companies to disclose cash flow from discontinued operations either in the cash flow statement or in its notes.

UK IFRS requires companies to disclose cash flows from discontinued operations either within the cash flow statement or in accompanying notes, ensuring transparency for investors.

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Sage financial reporting software can help with your reporting and the management and growth of your business.

Our cash management software also automates tasks and provides real-time, reliable cash flow visibility.

Sage Intacct has 150 built-in financial reports enabling you to easily create custom reports and leaving you with more time to focus on your business and prepare your financial statements.

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A cash flow statement offers a clear view of your business’s financial health, showing how well it’s performing during the current reporting period and over time. 

Whether you’re a small business owner, an entrepreneur planning for growth, or part of an accounting team keeping payroll and bills on track, understanding your cash flow is essential.  

Financial statements are vital for informing decision-making for leadership, investors, and creditors. 

Cash is the lifeblood of your company, so the management team needs to monitor the cash flow at all times to ensure survival balanced with growth. 

This guide covers what a cash flow statement is, what it shows, how to read it, and how to prepare one that supports better planning.  

It also explores why it’s a must-have tool for anyone doing market research, considering new opportunities, or assessing business performance over time. 

To get a head start, you can also download our cash flow template.

Here’s what we’ll cover

What is a cash flow statement?

A cash flow statement is a simple report that discloses your business’s cash outflows and inflows during a reporting period. 

It highlights where the cash came from and how it was spent, giving you a real-time picture of your business’s financial activity.  

It also helps you confirm whether your business can meet its everyday expenses and pay off any debts. 

Also known as a statement of cash flows, this document is one of the three core financial statements every business needs—alongside the balance sheet and the income statement (often called the profit and loss account). 

We’ll compare these three reports in depth below, but essentially: 

• Cash flow statements show how much your business has on hand and how it’s being generated and used. 
• Balance sheets show your business’s assets, liabilities, and equity. 
• Income statements show your business’s profitability. 

Cash flow statements follow standardised formats and formulas. 

In the UK, the format of your cash flow statement depends on the accounting standards your business follows. Most businesses use one of the following:  

If your business follows IFRS, your cash flow statement must comply with International Accounting Standard 7: Statement of Cash Flows (IAS 7), which outlines how to report cash movements during a financial period.  

What is a cash flow statement used for?

This financial statement serves several purposes for internal and external decision makers: 

• Creditors may use it to assess your organisation’s liquidity (e.g. the amount of cash on hand to meet short-term obligations). 

• Investors may use it to measure your company’s financial health and inform their valuation. 

• Shareholders may use it to monitor the strength of their investments over time 

• Accounting staff may use it to confirm whether your business can cover essential outgoings like payroll, tax liabilities, and overheads. 

• Potential hires and stakeholders (such as suppliers and customers) may view strong cash flow as a sign of financial stability, which can help build confidence in your business.  

• Market research may use it to assess the state of the market and the performance of their direct or indirect competitors. 

Because cash flow statements follow standardised reporting rules (such as FRS 102 or IFRS), they also work well as comparative tools. For example, you can use them to: 

• Compare two or more companies within the same industry or market. 

• Track a single company’s performance over several months or financial years. 

Cash flow statements can be produced monthly, quarterly, or annually, depending on your reporting needs. 

This is why accurate general ledger reconciliation is critical; even small errors can distort your overall cash picture. 

If your business is listed on the London Stock Exchange (including AIM), you’ll need to include cash flow statements in your financial disclosures under IFRS.

These disclosures are also subject to audit requirements and regulatory review under the UK Companies Act and IFRS, ensuring accuracy and compliance with legal standards.

This standardisation makes the cash flow statement a cornerstone of external accountability, especially in public markets. 

What does a cash flow statement show you about your business?

A statement of cash flow answers many important questions about the health of your business.

For example:

How liquid is your business?

This statement tells you exactly how much cash your business has on hand at the end of the reporting period.

It confirms if you can pay debts and operating expenses in cash.

What are your biggest sources of cash inflow and outflow?

The simplicity of this report makes it easy to see which activities contribute most to your business’s income and expenses.

How is your cash flow likely to look in the future?

You can compare multiple consecutive statements to identify patterns, anticipate future cash flow, and make data-driven decisions about business plans.

Is your business likely to receive financing?

Investors and lenders often review cash flow to make decisions about providing loans, lines of credit, and funding.

What should a cash flow statement include?

Cash flow statements follow a structure that lists your business’s operating, investing, and financing activities.

Each activity type appears in a dedicated section. This way, it’s easy to see which has the biggest impact on your business’s cash flow.

After listing your business’s activities, the statement shows the total increase or decrease in cash and cash equivalents. A positive number reflects a net increase, while a negative number reflects a net decrease.

The statement also includes the opening balance of cash and cash equivalents for the reporting period.

This figure equals the closing cash balance for the previous period and can be placed either at the top of the statement or at the end with the closing balance.

At the end of the statement is the closing balance of cash and cash equivalents for the current reporting period.

This closing balance figure will become the opening balance for the subsequent reporting period.

Cash flow statements also disclose non-operating non-cash activities, such as renegotiating debt as a debt/equity swap.

The placement of non-cash disclosures depends on the accounting standard your business follows:

• Under FRS 102, these transactions may also appear in the notes to the financial statements, rather than within the body of the cash flow statement itself.
• Under IFRS (IAS 7), non-cash investing or financing activities are typically disclosed in a footnote to the cash flow statement.

The 3 main activities of a cash flow statement

Every cash flow statement includes three main sections. Each details a specific type of cash inflow or outflow.

Operating activities

Operating activities refer to standard business activities.

This section of the statement shows how much cash your company generates through its core operations, such as selling products or providing services.

Cash from operating activities includes:

• Selling goods or services
• Paying suppliers and vendors
• Making interest or income tax payments
• Paying wages or salaries to employees
• Making rent payments for company facilities

Note:

Interest received and interest paid may be classified differently depending on the accounting standard.

Under IFRS, interest paid can be classified as either operating or financing, and interest received can be classified as either operating or investing.

FRS 102 allows similar flexibility, but classifications should be applied consistently.

Investing activities

Under IFRS, loans made to subsidiaries or third parties, as well as repayments received, are typically classified as investing activities.

This section reports cash used for or generated from acquiring or disposing of long-term assets, investments, or subsidiaries.

Cash flow from investing activities includes:

• Purchase or sale of property, plant, and equipment (PPE).
• Under IFRS, loans made to subsidiaries or third parties, as well as repayments received, are typically classified as investing activities.
• Purchasing marketable securities such as IP rights, or contracts.
• Acquisition or disposal of subsidiaries or business segments.

For investment companies, investing is part of doing business. In this case, any cash paid or owed for investments appears in the operating activities section.

Financing activities

Financing activities refer to  transactions that result in changes to the size and composition of a business’s equity and borrowings. 

This section of the cash flow statement shows how much cash your company generates from raising funds and repaying debt.

Cash flow from financing activities includes:

• Proceeds from loans or issuance of equity (e.g., shares).
• Repayment of loan principal
• Dividends paid to shareholders
• Repaying debt principal.
• Making payments to shareholders.
• Purchase or redemption of company shares.

Note:

Under IFRS, interest paid can be classified as either financing or operating activity, depending on your company’s policy and disclosure.

What are cash equivalents?

A cash flow statement includes both cash and cash equivalents.

Cash equivalents are short-term, highly liquid investments that can easily be converted into cash, typically with a maturity of three months or less and minimal risk of value fluctuation.

Some examples of cash equivalents include:

• Currency
• Bank accounts
• Treasury bills
• Short-term government bonds

Both the opening and closing balances in a cash flow statement include cash and cash equivalents.

You can prepare a cash flow statement using either the direct or indirect method for operating activities—both are permitted under FRS 102 and IFRS.

IFRS tends to encourage the indirect method, especially for larger businesses, but you have the flexibility to choose the approach that fits your reporting needs.

Direct method

The direct method is the more straightforward of the two. It’s particularly well suited to businesses using the cash basis accounting method, which is more common among smaller companies following FRS 102.

This method works like a simple cashbook, where you list and total all cash payments and cash receipts from the reporting period to calculate net cash flow.

Indirect method

The indirect method starts with net profit and adjusts for changes in working capital.

It is more commonly used by companies applying accrual accounting and preparing full IFRS or FRS 102 accounts.

This is because the indirect method uses your company’s income statement as the starting point for calculating cash flow.

The income statement counts income and expenses when they’re accrued.

To use this method, start with the net income. Then, adjust it by adding or subtracting all non-cash items.

Asset depreciation and amortisation are some of the most common adjustments. Both of these items decrease income, but they aren’t cash expenses.

An April 2024 amendment to IFRS requires companies to begin using the operating profit subtotal as the starting point for the indirect method. This change affects annual periods starting on or after 1^st January 2027.

It’s important to note that cash flow statements do not include non-cash transactions such as depreciation, amortisation, or stock adjustments.

These are excluded because they do not represent actual cash movements

How to read a cash flow statement

When reviewing a cash flow statement, finance professionals typically look for one of two outcomes:

• Does your business have positive cash flow (more cash coming in than going out)?
• Or is it showing negative cash flow (more cash going out than coming in)?

It’s important to remember that a cash flow statement captures your cash movements over a defined reporting period, not a snapshot at a single point in time.

To get a fuller picture of your business’s financial health, you should always compare multiple statements over different reporting periods.

 Comparing cash flow statements over time reveals whether your business is expanding, contracting, or undergoing a transition.

In more serious cases,  persistent negative cash flow may indicate financial distress or a risk of insolvency.

Negative cash flow

A statement showing negative cash flow indicates your business is spending more cash than it’s receiving.

Although this outcome may seem undesirable, it doesn’t always signal a serious problem.

Your business’s growth or funding stage may negatively affect cash flow for a limited time.

While cash flow may be negative during this period, ideally, the trend will reverse.

As an example, additional context or deeper analysis may reveal that your business is undergoing rapid growth or expansion.

In addition, early-stage startups often have a higher burn rate before becoming profitable.

Positive cash flow

A statement showing positive cash flow indicates your business is bringing in more cash than it’s paying out.

On a surface level, more cash flowing in than out reflects a financially healthy business.

However, positive cash flow doesn’t always equal a profitable business.

As a result, it’s essential to review your company’s income statement and balance sheet to analyse the underlying factors.

As an example, your business can achieve a positive cash position by taking out a large loan to mitigate cash flow problems.

This position may be temporary—and it may reverse once the repayment period begins.

Some fluctuation is inevitable. But businesses with uneven cash flow over multiple reporting periods often appear unstable.

Investors may view their risk level as too high and decline to fund them.

Cash flow statement vs. income statement vs. balance sheet

As useful as cash flow statements are, they only tell part of the story of your company’s financial health.

To gain a comprehensive view of financial health, it’s important to review the cash flow statement alongside the income statement and balance sheet.

Cash flow statement

This statement reflects the reality of your company’s cash position at the end of the reporting period.

It details what happened to the cash and whether your company has enough on hand to operate effectively.

It only includes cash inflows and outflows that have already occurred.

A cash flow statement doesn’t include credit-based sales or other income or expenses that haven’t yet flowed into or out of your business.

As a result, income statements and cash flow statements can show seemingly contradictory results.

An income statement may show a profit if your business has incurred substantial income, while a cash flow statement may show negative cash flow if your business has spent more cash than it received.

Income statement

An income statement serves as the starting point for the indirect method of calculating cash flow.

Also called a profit and loss (P&L) statement, it reflects your company’s net income at the end of the reporting period. It shows the cumulative effect of all revenue and expenses.

It includes several components that don’t factor into cash flow, such as credit-based sales and depreciation.

Neither of these line items reflect cash flowing into or out of your business.

That’s because the accrual method that most businesses use records income when it’s earned and expenses when they’re incurred. Often, this timing doesn’t align with when the cash arrives or leaves the account.

Balance sheet

A balance sheet reflects your company’s financial position at a specific point in time, showing what it owns and owes.

Think of this financial statement as a report that calculates your company’s value.

It reveals your company’s available resources, including assets, liabilities, and owner equity. In other words, it tallies how much your company owns and how much it owes.

This report doesn’t include revenue, expenses, or cash inflow and outflow.

The differences between UK GAAP and IFRS

Businesses typically prepare their financial statements under either FRS 102 or IFRS, depending on their size, complexity, and reporting obligations.

Both frameworks require a cash flow statement as part of the financial statements (except for certain small entities under FRS 102 Section 1A), but there are some key differences in how these statements are structured.

Here’s how FRS 102 and IFRS differ when preparing cash flow statements:

1. Cash equivalents

Under IFRS (IAS 7), cash and cash equivalents include short-term, highly liquid investments with maturities of three months or less from the date of acquisition, subject to minimal risk of changes in value.

FRS 102 adopts a similar definition but allows slightly more flexibility in how cash equivalents are interpreted and disclosed, especially for entities not applying full IFRS-level disclosure requirements.

2. Classifications of interests and dividends

IFRS allows flexibility in classifying interest and dividends as operating, investing, or financing activities.

From 1 January 2027, amendments to IAS 7 will mandate the use of a single classification approach for interest and dividends, enhancing consistency across reporting entities.

FRS 102 is less prescriptive and allows more discretion, provided classifications are applied consistently.

3. Bank overdrafts

Both IFRS and FRS 102 allow bank overdrafts repayable on demand to be included in cash equivalents if they form part of daily cash management.

4. Method of preparation

Both standards allow the direct or indirect method to calculate cash flows from operating activities

IFRS encourages the indirect method, especially for larger or listed companies.

FRS 102, often used by smaller businesses, is more flexible. Many SMEs opt for the direct method due to its simplicity.

Cash flow statement example

This example illustrates how a typical cash flow statement looks.

You can download a cash flow statement template here.

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To help you prepare your financial statements, Sage Intacct has 150 financial reports that allow easy access to your financial information.

With Sage financial reporting software you can create custom reports to help with your reporting, leaving you more time to focus on the management and growth of your business.

You can also have a real-time visibility into your financial data through Sage cash management software, which help you create accurate forecasts and build financial plans confidently.

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This article was verified by UK and Ireland-based Certified Public Accountant (CPA). Accounting rules are complex and change frequently and we recommend you seek any accounting advice from a qualified CPA.

Can you remember exactly what you were doing in March 2024? Probably not. So why should you be expected to remember every business transaction from that far back?

But HMRC’s Making Tax Digital for Income Tax (MTD) is set to change this.

MTD marks a fundamental shift in how you record and report your tax, and, by April 2026, it will be mandatory for sole traders and landlords with gross annual income over £50,000.

Here’s what we talk about in this article:

Why starting early with MTD makes sense

MTD expert and accountancy practice owner Rebecca Benneyworth is encouraging early adoption:

“By leaving it until April 2026, the pressure will really be on – especially for those getting to grips with new software and working with accountants and bookkeepers for the first time”.

Here’s what she has to say:

Getting started early isn’t just about compliance. It’s about saving time, money, and stress in the long run.

Intrigued about getting ahead of the curve? Here’s five reasons why starting MTD early makes sense for your business.

1. Avoid the admin headache

Picture this: it’s tax season. You’re surrounded by old receipts, mismatched invoices, and endless bank statements from the last 18 months, all while the submission deadline looms.

For many sole traders, landlords, and small business owners, this is the familiar reality of Self Assessment.

That’s why it could be time to get ahead with MTD.

Starting MTD early helps you move from reactive to proactive bookkeeping. Instead of scrambling once a year, your records stay current, meaning your year-end process is simply about confirming, not rebuilding.

Here’s how MTD makes that easier:

• Digital record-keeping: Store income and expenses digitally, not in piles of paper.
• Quarterly updates: Spread your workload throughout the year, catching errors early.
• Categorisation: Many MTD-compatible tools use AI to automatically tag transactions.

By the next tax season, you’ll have everything ready and organised, while others are still digging through boxes.

2. Get better control of your cash flow

When you file just once a year, tax estimates are often guesswork. Underestimate and you’ll face surprise bills; overestimate and you tie up cash you could use elsewhere.

MTD can help prevent that. By keeping your records updated quarterly, you’ll have a real time view of what’s coming in and going out. This allows you to:

• Spot upcoming cash shortfalls before they happen.
• Build tax reserves gradually.
• Identify spending spikes early.

That means, if a tenant leaves unexpectedly, or a big, unexpected cost hits, you’re not caught out. Because you’ve had your finger on the pulse all year, you’re better able to absorb disruptions. You can borrow or budget proactively instead of reactively.

3. Drastically reduce the risks of mistakes and fines

From incorrect categorisation to forgotten expenses, human error can happen, and sending one big year end tax return makes mistakes harder to spot. Instead, think of getting ahead with MTD as your own early warning system.

MTD means you’ll be doing partial updates throughout the year which gives you the chance to catch any mistakes early. By starting now, you’ll have more time to become accustomed to the software that can flag anomalies missing categories, duplicated entries, or large expenses, all while still being in control.

And, with HMRC’s ‘testing period’, you can familiarise yourself with all of this before MTD is compulsory and at a time where penalties for late quarterly updates are suspended. Now is the perfect time to learn and adjust, without the pressure of ‘getting it right’.

Think of MTD as your own built-in error detection system. You’ll catch and fix issues in real time, not months later – reducing your risk of fines, HMRC investigations, or sleepless nights.

4. Gain deeper insights for better decision-making

When your financial records live only in a year-end return, it’s easy to lose visibility over how your business is evolving. Trends, expense leaks, underperforming properties – all these factors can remain hidden until it’s too late.

Starting MTD early lets your accounting system become a living dashboard, and, because you’re logging and reviewing all year, patterns can emerge in:

• Profit margin trends per property or business segment
• Expense domains that might be inflating (maintenance, utilities, admin)
• Seasonal variations in cash flow
• Underused deductions or tax relief
• Unusually high expense categories that deserve investigation.

HMRC recognises this advantage, noting that MTD helps taxpayers to “see your predicted tax bill year-round and make more informed financial decisions.”

Suppose you manage two rental properties and over several quarters, you see that one property’s maintenance and repair costs are creeping above 20% of its rent, while the other remains stable at 5%. That insight gives you oversight of your finances where you may only notice it at year end.

Rather than losing time, you’ll have the decision advantage well in advance.

5. Reduce stress and gain peace of mind

Running a small business or managing multiple properties can be overwhelming, especially when tax deadlines loom. Last-minute scrambles, missing receipts, or unexpected bills create not just financial headaches, but real stress.

Starting MTD early changes that.

By keeping your records up to date and reviewing them quarterly, you create a calm, predictable rhythm to your finances. You’ll be able to:

• Approach tax season without panic, knowing your data is already organised.
• Avoid the late-night number-crunching and last-minute problem-solving.
• Free up mental space to focus on growing your business or enjoying time off.
• Build confidence in your financial decisions, knowing nothing is slipping through the cracks.

With MTD, your accounting becomes less of a yearly chore and more of a manageable, ongoing task. The result isn’t just better finances – it’s less stress, more control, and the reassurance that you’re on top of your business all year round.

Final thoughts

Switching to MTD early isn’t just about compliance. It’s an investment in your business’ future. You’ll have the clarity, confidence, and control long before the deadline arrives.

By the time MTD becomes mandatory for nearly everyone in 2028, you’ll already be compliant and ahead of most other businesses. So why wait for the deadline to loom when you can take control today?

Get ahead of Making Tax Digital

Whether you’re a sole trader, accountant, bookkeeper, small business owner, or landlord, Sage has the tools you need to start now and confidently meet MTD deadlines.

Start now with Sage

Often, advice around business AI doesn’t speak to the realities of running, for example, a café, plumbing business, or a one-person firm.

Start Strong With AI for Small Businesses is a free guide that shows you how to use AI with you as approver. AI spots overdue invoices, tidies your books in minutes, and turns meeting notes into clear task lists.

In this e-book, you’ll learn how to:

• Save hours each week
• Get paid faster
• Stay in control with approvals.

No jargon, no hype. Just practical return-on-investment (ROI) advice you can see that will help you start off strong.

What’s inside

Download the guide to get:

• Quick wins you can try today — like invoice reminders and expense logging.
• “Try this now” callouts with simple, fast actions.
• Safety checks to keep you in control of money, data, and approvals.
• Real quotes from small business owners who’ve seen the benefits.
• Step-by-step routines to help you build confidence with AI over time.

Who it’s for

This guide is designed for:

• Small business owners who want to spend less time on admin.
• Sole traders and entrepreneurs who need to move faster with limited resources.
• Professional firms (like accountants and bookkeepers) looking to cut costs while building client trust.

If you want AI that feels like a teammate – suggesting actions, drafting reminders, and asking for your sign-off – this guide is for you.

What small businesses say about AI

As AI use grows, it’s vital that businesses have clear policies on how information is handled. Confidential or sensitive information should never be stored in ways that make it identifiable.

Adam Williams, General manager, Tyne Chease

With approvals and logging in place, you stay firmly in charge. That balance between automation and control is what makes AI useful for small businesses.

Lean manufacturing is all about minimising waste while maximising productivity.

It is a practice first initiated by Toyota but has influenced manufacturing for decades, particularly the automobile industry.

Since then, many other industries have come to regard removing waste from their processes as beneficial to the bottom line.

As you streamline manufacturing processes to eliminate waste and shorten the time between receiving and orders, you can also streamline your accounting processes and use them to gather relevant operating information.

This provides valuable feedback on your manufacturing and inventory processes.

Without adapting accounting for manufacturing processes, especially as they increase in complexity as your business grows, it may be difficult to understand how changes in your operations are making a difference to your manufacturing bottom line.

To reduce the costs of doing business, you must understand first where your production costs lie.

It helps if you break down product costs from all the contributing factors that play a part in the cost of the manufacturing product – not only for each item but for all the activities that add cost to the end product.

If you want to refine your production process and automate aspects of your business, accurate costing information helps you identify wasteful costs passed on to the customer or absorbed within the company.

This is all in aid of increasing your revenue and your profit margins.

Ready? Let’s get started. Here’s what we cover in this article:

Manufacturing cost terms to understand

You need to think beyond profit and loss to manufacturing costs such as the costs of materials, plus the cost to convert these materials into products.

This is necessary, for example, to understand how you should be pricing your product and how to achieve or exceed your set profit margins.

In a manufacturing business, there are some important terms you need to understand when it comes to calculating the costs of manufacturing your product, as well as the amount of inventory you hold.

Direct materials

Direct material (or raw material) inventory is a calculation of all the materials your manufacturing business is using to make your product – all the materials consumed or identified with your product.

Very often, this is listed in a bill of materials, which itemises quantities and costs the materials used in your product.

In process manufacturing, such as food and beverage or chemicals, the bill of materials is known as a production recipe.

Direct labour costs

Direct labour is the value given to the labour that produces your goods, such as machine or assembly line operators.

Generally, this includes the cost of the regular hours, overtime, and relevant payroll taxes.

Manufacturing overheads

Along with direct materials and direct labour, you must include the cost of manufacturing overhead to ensure you get the right valuation when it comes to inventory and selling price.

Manufacturing overheads might include the costs for powering a factory’s equipment and personnel not directly involved in producing the product.

Work-in-process goods

As part of the manufacturing process, your business is likely to have items in production that have not yet been completed.

This will be an accumulation of the money you have spent on direct materials, direct labour costs, and manufacturing overheads on each work-in-process item in your inventory.

Finished goods

This is the cost associated with the goods you have completely ready to sell to your customers. You would also add the cost of storing these finished goods and other associated expenses.

On your typical manufacturing balance sheet, you should have raw materials, work in process, and finished goods as part of your inventory calculation.

You will also want a periodic or perpetual inventory system to track how many products you have in your production line at any one time.

Production costing methods

When it comes to accounting, you need the right costing method to help you achieve higher profitability. Accounting software for manufacturers may offer different costing methods.

Here are the ones that you should be aware of:

Standard costing

Standard costing is an accounting system where you establish standard rates for materials or labour used in production or inventory costing.

By doing this, you can work out the labour and material costs to produce a single unit of your product.

Having these standards allows you to detect variances that can be analysed, allowing trends to be spotted, and enabling you to make the right adjustments to pricing.

If you are spending more on manufacturing the product than necessary, you will not meet your income targets.

Look at where the inefficiencies are in the production process and where the waste is coming from, adjusting the pricing if required.

Standard costing is useful if you are making similar products or large quantities of a specific product.

Job costing

Job costing, also known as variable costing, is better if you manufacture to order or focus on a small amount of units.

For example, this could include a custom-built machine or a small batch of products.

This accounting system allows you to work out the individual cost of manufacturing for a product and apply the right mark-up to get the project margin you desire.

You might look at each project in detail – down to costs, materials, and overhead. It is particularly popular in construction.

Activity-based costing

This is a costing method that differs from job costing in that it incorporates more indirect costs, such as resource consumption.

It can help you hone which products are profitable and spot opportunities to drive better results for your existing products.

This might be good if you have a complex product mix.

Inventory valuation

Inventory management is crucial for a manufacturer.

At the end of an accounting period, at the end of the financial year, you will want to have a value associated with the number of goods in your inventory.

Valuing your inventory will help establish the costs of goods sold and how much profit you are making. Having a shortage or excess inventory directly affects the production and profitability of your manufacturing business.

Inventory is continually being sold and restocked, so you may need to make a cost flow assumption. There are four accepted ways to value inventory.

First in, first-out (FIFO)

Many manufacturers use the ‘first-in, first-out (FIFO)’ method, where products are sold in the order they are added to inventory.

A popular way of costing inventory; this could work for businesses that have products with a shelf life.

Last in, last out (LIFO)

This inventory valuation method operates under the assumption that the final product added to a company’s inventory is the first one sold.

Fewer manufacturers use this method.

Average cost

This is a common accounting method that uses a weighted average of all products to determine and track inventory.

Average costing is useful in situations where it is difficult to assign costs to specific or individual products.

Specific identification

This accounting method tracks individual items of inventory, which is useful if you can identify each item with, for example, a serial number or radio-frequency identity (RFID) tag.

This can produce a higher degree of accuracy, but many manufacturers are unlikely to have items that have a unique identification.

This is better for high-value items that need differentiation, rather than interchangeable items.

What you should look for in your manufacturing accounting software

Without accurate, timely and quality information, it won’t be easy to understand what is happening in your business.

As a manufacturer, you must always be on top of materials and other associated costs to correctly price your finished items. At the same time, you need to consider external market factors affecting your business and industry.

It would help if you had a manufacturing software solution that allows you to deal with the extra complexity of calculating inventory and the cost of your manufacturing goods.

This software can be used to extract data and analyse trends, improve efficiency, and make the best business decisions.

Your manufacturing accounting software should also help you keep compliant with regulations and the tax laws of the countries you have a business in.

Often, manufacturers invest in an all-in-one solution, which handles other tasks away from finances, such as planning and production. This is known as enterprise resource planning (ERP).

Ideally, data should move freely between production lines and the back office, meaning you have accurate real-time data.

Final thoughts

Features found in accounting software such as inventory management can help you optimise the way you use inventory, such as providing alerts when your stock needs replenishing.

It is crucial when understanding raw materials, work-in-process, and finished goods.

It will avoid a situation where you have too much inventory (which costs money) or, even worse, not enough inventory, where you can’t fulfil the requirements of your customers.

This article was first published in August 2022 and has since been updated for relevance.

The accountanting industry is being revolutionised by AI.

Accountancy training is no different. AI offers transformational changes for those ready to embrace it.

In this article we take a look at what accountancy training looks like in this new AI era, and what kind of career it will lead to.

In short, if you’re thinking of training as an accountant – or considering switching your career – this is a great place to start. Here’s what we discuss:

How AI is changing accounting

Over the last few years fears have been expressed about AI taking away jobs in professional services, especially at the entry level.

However, as many commentators have pointed out, this simply isn’t true. It never has been.

Whenever new technologies have been introduced, all the way back to the Industrial Revolution, rather than the total numbers of jobs being lost, new ones have emerged.

But these new jobs require new skills – and a new mindset.

According to a survey published earlier this year by Chartered Accountants Worldwide, 83% of 18- to 24-year-old chartered accountants surveyed are using AI at least once a week, for simple tasks such as data entry and general productivity.

“I think it’s safe to say there’s a mixture of excitement and anxiety, as you’d expect,” says Sarah Beale, CEO of the Association of Accounting Technicians (AAT), the global professional body for accounting technicians and bookkeepers. “AI is a huge change. Not everybody understands it but there’s a huge level of positivity.”

To hear more of what Sarah has to say, watch our video below, which is part of Sage’s docuseries about the AI opportunity for businesses:

A survey published in June 2025 by AAT revealed that four in five accountants (78%) agree that automation will make their jobs easier, freeing them up from administrative burdens, while 64% believe that AI tools will enhance efficiency and accuracy in the accounting profession.

Despite fears about AI taking their jobs away, younger accountants are particularly enthusiastic with 84% of those aged between 18 and 35 saying that it’ll improve accuracy and efficiency.

AI means problem-solving and strategic advice

Even more (80%) of AAT’s respondents reported that AI would enable them to support businesses with strategic advice and problem-solving.

This figure is important because it demonstrates how anyone currently going through accountancy training and indeed, progressing through the profession as a whole, needs to think about how they can offer clients greater value.

Whereas the emphasis was once on numbers and maths, with even the most sophisticated calculations now being undertaken by AI, accountants can spend more time providing clients with holistic business advice.

It’s important for you to be able to tell a client how they’re doing financially but it’s even better if you can tell them what the figures mean and what the client needs to do next to secure and grow their business.

This means that the next generation of accountants will have to be more skilled at dealing with people – in other words, showing empathy and understanding their clients’ needs and motivations – than they are dealing with spreadsheets.

For instance, back in 2015, if you were in accountancy training, you’d be focussed on manual data entry and grinding your way through spreadsheets. You might have found yourself sampling invoices manually, using paper-based evidence for vouching during audit training, or verifying numbers with Excel tie-outs.

Today, as the use of technologies such as cloud computing, automation and generative AI becomes the norm, you’ll be reviewing exceptions and taking a more holistic, insightful approach to company accounts, rather than ploughing through whole reams of figures and data.

“The key to success with any AI tool lies in how it enhances the services we deliver to our clients,” says Sam Rumens of Streets Accountants. “We must use the right tools for the right tasks.

“One area we’re currently focusing on is around bookkeeping data capture. We’re introducing various AI-driven tools that are proving highly effective in this space.

“Early results show that automating this process can significantly reduce errors that can arise from manual entry. However, these tools still rely heavily on human oversight, due to the core data and settings, and this creates an added layer of security and accuracy that is essential whenever using AI.”

The more tailoring we do, the better the AI gets.

Sam Rumens, streeTs Accountants

AI and the career path for junior accountants

Even though AI fundamentally affects accountancy training and the work of junior accountants, they will still start in a junior role such as tax trainee, audit assistant, or accounts assistant.

But increasingly, rather than carrying out calculations and pulling together figures for a balance sheet or P&L as AI carries out manual, repetitive tasks such as data extraction and reconciliation, they’ll have the opportunity to focus, instead, on more interesting, rewarding activities – activities that AI cannot yet perform.

“This shift allows trainees to build real client skills earlier in their careers, which makes the work more engaging,” says David Kindness, a Certified Public Accountant CPA and tax expert. “Instead of spending all day keying in numbers, they get to learn how to analyse data, spot patterns, and talk with clients about what the numbers actually mean.

“Most of the young accountants I speak to see this as a welcome change because it opens up growth opportunities that used to take years to reach.

“Overall, AI is creating a better balance. It automates what machines do best, and it empowers accountants, even at the entry level, to do more of the thoughtful and client-focused work that drew them into the profession in the first place.”

However, regulators such as the Financial Reporting Council (FRC) are scrutinising AI’s impact on audit quality.

A US law firm was embarrassed, for instance, when it turned out that a submission to a court created by AI had simply invented evidence and case judgments.

This means that when you’re training to be an accountant these days you’ll need to learn about how AI affects controls, documentation, and ethics.

AI can take on manual work, but what it can’t take on is accountability and responsibility.

Similarly, as part of your accountancy training course, you’ll increasingly find yourself documenting your professional scepticism and curiosity and ensuring that what you’re doing complies with audit firm policies as well as industry regulations.

AI and accountability in accounting

“It’s all about maintaining accountability,” says Sarah Beale. “Putting the guardrails around what we use and making sure that people understand the limitations. Having really clear policies and being transparent about where they’re using it so that their clients and businesses are aware of it is essential.

“I think the big thing for our profession is that we need to maintain trust and confidence in what we do. So we don’t want to leap into using something that we don’t understand or that we can’t verify ourselves.

“We want to give people confidence about when they should and should not feel comfortable to use it.”

We’re starting to embed digital literacy, digital tools and ethics around the use of AI in our qualifications.

Sarah Beale, CEO, AAT

Over the coming decade, in chartered accountancy training there will be more focus on assurance of AI-produced evidence as well as an emphasis on systems thinking, controls testing, data literacy, and client-facing advisory.

AI brings with it a range of ethical and privacy issues. Accountants will have to ensure that they’ve got the right policies and procedures in place here. The good news is that there’s plenty of advice and guidance available to help you to handle these important issues.

The benefits of AI to trainee accountants

AI technologies such as Sage Copilot can provide accountants with dynamic, real-time insights so that the next generation of accountants will respond in a more agile, timely manner to changes in their clients’ businesses.

The new MTD agent AI tool has arrived just in time to reduce the workload of MTD for Income Tax.

Tools like this can easily give detailed insights revealing relevant information so that people can make decisions faster, and based on better evidence.

AI can also ensure that trainee accountants never miss a deadline for VAT returns and other important filings.

Another interesting development ushered in by technologies is that they can open up the profession to more people from different backgrounds who might be interested in training to be an accountant.

Now, AI is helping to reposition training as an accountant as a modern, tech-forward profession. As AI reduces the emphasis on arithmetic and spreadsheets, accountancy is widening its appeal as a profession.

The AAT survey revealed that automating mundane, manual tasks involved in accountancy could broaden the appeal of the profession, with two in five people saying that they’d consider a change of career to move into accountancy if they could use AI to replace these routine tasks.

More young people – and career switchers – with a wider range of skills and academic qualifications are being drawn to training as an accountant.

Not only that but the pathways into accountancy are also more varied and easily accessible now. You don’t need a degree, for a start. The apprenticeship schemes offered by professional organisations and industry bodies such as the AAT, ICAEW, ACCA, CIMA, and CIPFA, are open to almost anyone aged over 16 and they’re a great way to earn while you learn.

Careers in accounting: how AI is broadening the field

The AAT-ACA Fast Track route has been developed by the ICAEW and AAT, and it allows anyone with an AAT qualification to get onto a fast track to become a Chartered Accountant (ACA) using the learning and work experience that they’ve gained with AAT.

With most accountancy apprenticeships you’ll spend one day a week at college and the rest of the week working in an office, supporting and shadowing more experienced colleagues and putting in practice what you’ve learned in your lectures and tutorials. Apprentices are usually entitled to at least 20 days of paid holiday per year, plus bank holidays.

Because AI will never be able to replace the human element in accounting, ensuring that you stand out from the competition, improving your CV, and extending your experience is something that you’ll still need to do yourself.

This means looking out for little bookkeeping jobs or taking on a voluntary role as treasurer for a charity.

Internships and placements will be as important as ever, as will rotations in specialist areas such as tax and audit. This is where you’ll develop those increasingly essential people skills and develop the kind of industry knowledge and business experience that AI can never replace and that will be more vital than ever for the successful accountant of tomorrow.

Final thoughts

With AI advancements the field of accountancy has never been so accessible. It’s likely that career progression in future is going to be similarly wide-open, with varied skills coming to the fore.

So, you want to be an accountant? Well, there has never been a better time to start.

The accountant’s guide to Making Tax Digital for Income Tax

Download this free interactive guide to developing your practice approach to Making Tax Digital for Income Tax.

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In days gone by, it was clear what your manufacturing business needed to do. You needed to make things. And that was it – you created tangible products that customers could see and touch, which they could hold as inventory.

With “servitisation”, today is very different. Read this article to find out what it means for your manufacturing firm, how data can play a role in offering customer service and tips to offer services to your customers.

Here’s what we discuss:

What is servitisation?

If you want to grow your business and thrive in today’s challenging economy, you need to offer more than products to your customers in the form of added-value services – to servitise your offerings.

This means that as a manufacturer, you need to integrate your products with services, adapting your business models to offer additional value on top of what you make.

Factors such as commoditised products and shrinking margins mean you need to build in resilience if you are going to continue to thrive and make your business strong enough to deal with external uncertainties. You need to build in new value in what you offer and differentiate your business from the competition.

In research of 60 industrial engineering companies in Europe by PA Consulting, 75% expected that delivering services will become a significant part of their business in the next three to five years. They will be able to take advantage of higher margins and a closer relationship with customers.

Manufacturers are already offering services

Although you might not recognise servitisation as a term, it’s likely that you have already incorporated it in your business. Many manufacturers have already adapted and changed their business models by offering benefits such as repair guarantees, maintenance and help desks.

For example, ACO Manufacturing offers important services on top of its manufacturing of surface water management systems. The complexity of designing these systems means it offers customers added services such as whole system design, hydraulic calculations, AutoCAD detailing and parts schedules.

Technology is an enabler because it offers new ways to connect.

To take advantage, your manufacturing business must be data-driven to define and create new services, while working with your customers to understand their needs.

You must look at business management solutions that deliver a view of all actions that are happening within the organisation. With information across the entire lifecycle, from manufacture to delivery and aftercare, you’re armed with the data on your customers’ purchases, which allows you to identify where new service opportunities exist.

The value of the Internet of Things

Industry 4.0 and the Internet of Things (IoT) can play a key role when looking to provide proactive value-added services to customers. It’s an exciting opportunity for manufacturers to monitor the products they create directly without having to wait for them to go through an intermediate such as a consumer or distributor.

Interconnected smart devices can collect valuable data that you can use to offer services in addition to products, therefore delivering additional value to the customer. Fundamentally, IoT allows you to extend the base services that you already offer, increasing overall effectiveness and productivity.

IoT is already accessible to businesses and it’s a matter of when, not if, manufacturers should use it. It’s a way that your manufacturing business can move from simple product-based services to more advanced services that offer significantly more revenue potential.

You can start with more simple projects involving tracking or visibility, to more sophisticated advanced services requiring automation, artificial intelligence or predictive analytics. It also makes sense to start with simpler projects than ones that need more resource and outcome optimisation.

Manufacturers that own their facilities may already be adopting IoT, and it makes sense for those with long product cycles to adopt it to change their products and services.

Servitisation in discrete manufacturing

Discrete manufacturers are challenged with increasing customer expectations and more competition. To meet the needs of well-informed digital customers, better connect supply chains, assets and products leads to servitisation.

Leaders in this industry will be able to create significant business value through connecting products and people, increasing the efficiency and effectiveness of their operations.

For example, hi-tech, automotive or industrial equipment businesses can focus on improving customer experience, whereas before they may have concentrated on the production and engineering side.

A lot of innovation come from combining analytics with robotics, where deep customer insight and the ability to offer services at scale can change the game.

Another example where IoT could work well is in construction, where a business can offer a full maintenance and repair service, where they can carry out preventative maintenance on the machines they offer.

Using telemetric data from the machines, a manufacturer could proactively schedule a maintenance call to service the equipment and make sure it does not fail, reducing potential downtime for the customer and ensuring customer satisfaction.

Five tips for servitising manufacturers

Here are five ways for your manufacturing firm to find success with servitisation:

1. Connect and engage with your customers. They are the group that will benefit most from value-added services, while providing the data that will assist with innovation.
2. Prepare case studies of successful servitisation examples and explain to your customers the value they will get with them.
3. Ensure new services do not compete or conflict with what you already offer.
4. Make sure the service offers fit or differentiate the brand or image of your manufacturing firm.
5. Hit momentum by tapping into current market trends and the changing needs of your customers.

Final thoughts on servitisation

With digital transformation and connected customers changing manufacturing, Industry 4.0 creates a new paradigm where the cloud, analytics, AI, robotics and IoT can support your business in being more productive and efficient in a multitude of new ways.

Cloud-based technology, business management systems and actionable data creates the platform for servitisation, turning your business from one that just builds products to one that offers customer-focused services with products.

Industry 4.0 will help you build better long-term relationships, get better visibility and open the door to new products and services to unlock more revenue streams. Servitisation could be the key to remaining competitive in an evolving marketplace.

This article was first published in June 2019 and has since been updated for relevance.

Behind every tax deadline is an ocean of detail.

Your clients see deadlines met, tax bills sorted, books that are tidy, and payroll that runs smoothly.

But the reality is different. You’re managing ever-changing tax laws, keeping up with evolving HMRC guidance, reconciling errors, juggling multiple systems, and handling endless back-and-forth communication. And that’s only scratching the surface.

In this article, we explore how AI is helping to shape and enhance these challenges.

Here’s what we discuss:

The impact of agentic AI on compliance

The way accountants handle compliance is undergoing a fundamental shift.

As new technologies like agentic AI emerge, the manual and repetitive tasks that once defined compliance are being stripped away.

One of the clearest examples of this transformation is Making Tax Digital (MTD). It’s no secret that MTD is reshaping the UK tax landscape, and the next wave is around the corner in April 2026.

While this brings new challenges, this time you’ll have something extra on your side: agentic AI.

Here’s how Georgina Timothy, Director of Product Management for Sage for Accountants, summarises agentic AI for accountants:

MTD is going to be more than a digital filing requirement, it’s a fundamental shift in how tax is reported and how data flows between HMRC, accountants, bookkeepers, and their clients.

By April 2026 sole traders and landlords with a gross qualifying income over £50k must comply and, by 2028, that threshold lowers to £20k, which will bring thousands more into scope.

With this expansion comes quarterly submissions and more frequent data touchpoints, which could leave room for more errors.

Even though this shift may seem like a compliance headache for both you and your clients, it’s also a strategic opportunity for your practice.

As compliance becomes more about reviewing rather than inputting information, agentic AI can step in to transform the process.

MTD will become a reality, but it brings with it an opportunity to simplify and automate.

Georgina Timothy, Director of Product Management, Sage for Accountants

Why agentic AI matters for MTD

Unlike generic AI, agentic AI won’t just automate tasks. It will adapt, anticipate and support you in real time.

These tools help you to stay compliant, reduce admin, and deliver more value. Here’s how:

• Real-time categorisation: Transactions are tagged correctly at the point of entry, reducing the need for end-of-year clean-up.
• Error detection and correction: AI reviews the submitted data, flags anomalies, and can even suggest or apply corrections.
• Workflow automation: From receipt capture to quarterly submissions, AI can streamline the entire MTD process.
• Client insights: AI provides actionable feedback, helping clients understand their financial position and tax obligations.

Beyond merely digitising tax returns, MTD can also be seen as an opportunity to reshape your relationship with your clients.

MTD isn’t a one-size-fits-all, so you’ll have some clients that simply rely on you to file their final return and others who want you to handle everything end-to-end.

Agentic AI adapts to each of these scenarios, helping you to manage your workload no matter how your clients prefer to work.

Traditionally, most of your admin time is spent chasing clients for missing information and reviewing records. Agentic AI should unite advisors and small businesses closer together with deeper, more regular collaboration.

It will help you:

• Capture information correctly at the source
• Automate client follow-ups and document collection
• Free up more of your time for deeper, more frequent collaboration.

The result? Stronger relationships, richer conversations, and greater client trust.

Selecting the right AI tool is one of the most important decisions your practice will make as MTD for Income Tax approaches.

The right tool won’t just help you comply. It will transform how you work and how efficiently you operate.

That’s where the Sage MTD Agent comes in.

The Sage MTD Agent combines trusted Sage functionality with brand-new capabilities to streamline every stage of MTD, from the first client record, right through to the final submission.

Rather than relying on click-through menus to complete each step, the MTD Agent handles multiple, interlinking tasks at once, anticipating what needs to be done, organising information, and flagging anomalies.

Here’s everything you need to know:

• Less admin: There’s up to 80% less admin for you through intelligent task automation.
• Automated client segmentation: Instantly identify which clients are MTD ready, then add preparation tasks to a shared list that can be assigned to team members and set to recur.
• Quarterly submission reports: Automatically pull data from digital accounting records to draft quarterly reports for review and HMRC filing.
• Proactive document chasing: If information is missing, the agent can contact clients via email, WhatsApp or in-app notifications.
• Streamlined efficiency: Benefit from 40% less manual invoice handling and an average of 5 hours saved per week.

Even with all these advanced capabilities, you have the ultimate control. You can decide:

• Which clients to work on and when
• The level of automation for each workflow
• Whether the agent simply prepares tasks or fully completes them.

Tax is swiftly become digital-first, and compliance is no longer a tick box exercise – it’s about accuracy, efficiency, and insight. With MTD deadlines looming, the practices that embrace AI now will be best placed to thrive.

Final thoughts

Agentic AI isn’t here to replace accountants. It’s designed to support you, anticipate what needs to be done, and keep you firmly in control.

If you’re ready to future-proof your practice and help your clients navigate MTD with confidence, now is the time to explore how Agentic AI can support every step of the journey.

The accountant’s guide to Making Tax Digital for Income Tax

Download this free interactive guide to developing your practice approach to Making Tax Digital for Income Tax.

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